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Business rate reform: does the 2017 budget go far enough?

Posted on March 20, 2017.

In his (final) Spring Budget on the 8th March, Chancellor of the Exchequer Philip Hammond announced a series of measures to help businesses who would be affected by the punitive changes to business rates, which we discussed in a previous blog post. Despite some lobbying from businesses to have the rates scrapped altogether, the Chancellor was only able to deliver three reforming measures in the red book.

What are the current planned changes to business rates?

The changes take effect in April, at the beginning of the new financial year, with new business rate values replacing the old 2008 values. Since business rates are calculated in relation to property prices, the increase in property value since 2008 means businesses (especially in London and the South-East) will see sharp rises in their business rate bills. It is feared that these hikes will have a detrimental effect on independent and small business owner.
In addition, the government is reviewing and implementing changes to the business rates appeal process. Currently the VTE (Valuations Tribunal for England) can order a change to a business rate value wherever it sees fit. In future, it will only be able to mandate changes where a property valuation is deemed to fall outside "the bounds of reasonable professional judgement".
This means that any appeal which falls within a small margin of error could easily be thrown out, with business rates miscalculations easily going unnoticed or unregulated.

What are the Chancellor's reforms to business rates?

The package unveiled by the Chancellor in the Spring Budget contained three key measures to ameliorate the impact of these reforms.

Promising to cap the business rates rises of smaller businesses at £50 a month for those businesses losing their rate relief.

A £300 million for local councils to give discretionary relief for individual hard cases in their area.

A rate reduction of £1000 for 90% of British pubs, which have arguably suffered the most from punitive rate rises.

These cuts/relief measures in the business rate system amount to a grand total of £435 million, but many businesses have already complained that such rises amount are insignificant when placed alongside the £25 billion which the business rate tax raises for the Treasury.
In addition:

200,000 appeals against business rates are yet to be decided, and many local authorities have cited their concern that the length and complicated nature of the appeals process will leave them out of pocket. This is combined with the fact that the appeals process will also be undergoing changes as of the start of the new tax year.

The car industry has expressed concerns that sharp rises in business rates could further hamper investment in their sector, which is already facing considerable uncertainty in the run-up to Brexit.

When pressed, the Treasury was left unable to definitively how many British pubs would receive the £1,000 discount.

Why does the business rates system need further reform?

They are punitive for businesses: as we have discussed above, the business rates system is proving crippling to small and medium sized businesses who can ill-afford another massive hike. In areas such as London and the South-East, business owners fear for their financial future in areas where property price increases have been especially noticeable.

Business rates are an archaic system: another key reason why some businesses are deeply opposed to the current rate system is the argument that it no longer reflects the modern British economy. Mike Coupe, the chief executive of Sainsbury's has argued that the entire system of business taxation needs to be overhauled in the face of the new digital economy. Since a great deal of businesses now trade online, the arguments for the current business rates system seem increasingly out of date. It also means that property-based companies are more heavily penalised and their more digital counterparts.

Problematic for investors: In a previous post, we discussed how the uncertainty caused by such long gaps between rate increases is a disincentive for potential property owners to invest in commercial property. Business rates are a property tax, and not a land tax, meaning they can discriminate against certain property types.

Case Study: Business Rates and Commercial Property

What do business rates mean for commercial property owners?

Whilst business rates arguably face the greatest coordinated opposition from business owners, and the occupiers of commercial properties, it is actually the landlords who must shoulder the greatest share of the business rate burden.
A report by the economic research agency Regeneris in December 2015, cited how the cost of business rates is a burden which the landlord must ultimately bear. The report's main conclusions were:

Changes in business rates are reflected in longer term adjustment in rental values.

Since commercial property rents are fixed for three-five year periods, there is a time lag between changes in rates and the feed through into property rentals.

Changes in business rates can lead to losses of up to £15o million in development capital for landlords.

A landlord's financial liability for business rate hikes will only increase over time.

Whilst the business rates system may be something the UK government has no intention of scrapping any time soon, there are some clear pitfalls for commercial property owners.

The long gaps in rate re-evaluations (seven years in the most recent instance) are creating massive uncertainty for commercial property owners, especially since property prices and rents have risen so sharply in the mean time.

The business rate burden is reducing the incentive for owners to invest in their commercial property assets.

Because business rates are a property tax, as opposed to a land tax, they are levied on certain types of property and thus can have the unintended effect of disincentivising certain types of property investment.

Overall a rise in business rates will reduce the amount of revenue a landlord can earn from a commercial property.

The rise of property guardianship and its impact on rate payers

The fact that business rates are a kind of property tax means they can punitively affect landlords who may be sitting on a vacant or empty property. One of the reasons why property guardianship has become part of a national conversation around the safeguarding of commercial property assets is because it offers commercial landlords the chance to maximise the value of property whilst lowering costs which would be incurred by business rates.
Property guardianship changes the ancillary use of a building from commercial to residential; this allows business rates in a building to be reduced to zero (or close to zero) and ensures the long-term value of the property is retained. Because a property guardian utilises the ancillary use of the property as a domestic space, commercial landlords receive guaranteed prevention of squatters taking over the empty building, as well as saving money on security costs and ensuring a building does not fall into disrepair.
So let's say the current disparities between a commercial occupant's rent and the business rates passed onto the landlord continue to grow and the business was priced out of the property: property guardianship maintains the infrastructure of a building whilst allowing the landlord to continue to gain maximum value from their asset.
Commercial property is just one example of the ways in which the business rates system is out of date, and almost bizarrely discriminating against a certain sector of the property market. Whilst businesses up and down the country have welcomed the Chancellor's relief efforts, there is near consensus that the reforms don't go far enough to address the problems in the system. Mr Hammond has stated that the frequency of the business rate revaluations will not be reviewed now until 2021, when the next revaluation is due to take place.
In the short term, too many businesses face financial uncertainty in the face of the new rates. In the long-term, too many aspects of the business rate system fail to take account of the changing nature of the British economy.